retirement

5 factors about phased retirement packages

Highlights
  • Phased retirement programs offer workers a chance to retire gradually.
  • Such arrangements may adversely affect pension and health benefits.
  • Depending on your age, phasing out may also impact Social Security.

The most recent stock market rout has many Americans postponing retirement while others are wondering if they'll have to work forever. In between are those who would like to work part time for their current employers for a couple of years before taking the final plunge into retirement.

Some companies are accommodating valued employees with so-called phased retirement opportunities. While currently only 5 percent of midsize and large companies offer a formal phased retirement program, nearly 60 percent expect to develop one in the next five years, according to a 2008 survey by Hewitt Associates.

But is this a good idea for workers?

Potential drawbacks
  1. Pension problems.
  2. Health care restrictions.
  3. Profit-sharing incentives.
  4. Social Security issues.
  5. Spousal and death benefits.
When Arnim Meyburg, Ph.D.,  a civil and environmental engineering professor at Cornell University in Ithaca, N.Y., hit 67, he was ready to start winding down his career. "I have so many hobbies and unfinished business; I wanted to use my healthy years to accomplish that," Meyburg says. "But I didn't want to go from 100 miles per hour to zero in one shot."

Meyburg's solution? Ease into retirement slowly. Enrolling in Cornell's phased retirement program -- a one- to three-year plan that allows faculty to teach part time while still retaining their full health care and retirement benefits -- Meyburg gradually transitioned into retirement over the course of two years, giving him time to adjust to the lifestyle change.

"It was absolutely perfect," Meyburg says. "I traveled more; I was much more relaxed. Not having this additional teaching allowed me to look after other interests more than I could ever do before."

Varying tremendously from plan to plan, phased retirement programs offer would-be retirees the opportunity to gradually adapt to full retirement. However, they also come with growing concerns over how scheduling flexibility will affect retirement benefits, such as Social Security, health care and pension plans. Before signing on the dotted line, consider these five potential problems with phased retirement packages.

Pension problems

While phased retirement made no impact on Meyburg's pension plan, Keith Brainard, research director for the National Association of State Retirement Administrators, says that not everyone is so lucky.

"Under many arrangements the pension benefit is determined by the combination of salary and years of service," Brainard says. In fact, many pension formulas place a higher weighting on earnings during the final years of employment -- which ultimately benefit full-time workers.

"If you're working half time and making half pay in your work, that could reduce your final average salary calculation and reduce your long-term pension benefit," Brainard says.

Before signing on, those enrolled in a defined benefit plan -- especially workers in public sector jobs where defined benefit plans are the norm -- should investigate how a reduced salary for the last few years of employment will affect their pension calculation. Union workers who draw retirement benefits through both their union and current employer should also ask about how going part time could affect both plans, says William Blyth, president of Blyth and Associates, a financial services firm in Chicago.

"Under most union plans, you have to work a minimum of 1,600 or 2,000 hours a year, and if you work less than that, you may not get credit for that year," Blyth says. "Union workers that spend most of their time with one employer may also have a plan with that company. If that were the case, their second plan could be affected, too."

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If reducing working hours will also lower your pension earnings, an alternative option is to quit your current job, begin taking your full pension earnings, then return to the company as a part-time employee or independent contractor.

Health care restrictions

Reducing your hours could also render you ineligible for company-sponsored health care. While that may not matter to workers 65 and over who are switching over to Medicare anyway, workers who don't yet qualify or who plan to rely on company-sponsored insurance to supplement their Medicare package could find themselves losing much of their reduced salary to increased health care costs.

"That's a real problem," says Blyth. "A lot of people retire or move toward retirement, find out their health insurance is actually more than their pension and have to try to unretire."

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